My wife and I have owned a single family rental house in Indianapolis for 1 year and are trying to decide between an LLC versus a personal umbrella policy. We currently live in CA, but are moving to Illinois in the coming months - so this will be our state of residence soon. We have an insurance policy on the rental house (through State Farm), that includes a personal liability section, which is essentially equal to our current net worth.
Given that a tenant could sue for more than this if an accident occurred, we are thinking about adding either LLC or an umbrella policy (or both) as extra protection.
Any advice on which way to go, and if LLC, any recommendations for a law firm or company the Indianapolis area?
Just note that if you want to put the property into an LLC and have a mortgage on it, you will need to talk with your provider to see if this is possible without refinancing.
Just note that if you want to put the property into an LLC and have a mortgage on it, you will need to talk with your provider to see if this is possible without refinancing.
I sell insurance and prepare income tax returns but I am not an attorney and don't play one on television or radio.
The Illinois Legislature has a law either pending or just passed that will GUT LLC protection. Rendering the LLC almost useless in Illinois. The new law eliminates the corporate veil for LLCs.
You should purchase the maximum liability protection you can get on the property policy. Then get a COMMERICIAL Umbrella policy or 1 or 2 million.
Then get a personal umbrella policy to cover your home and vehicles. Auto limits of 250/500/250 and Homeowners liability of 500K should be the minimum you carry. You can always get more. A personal liability policy "MAY" extend to one or two rentals but if you are planning on building a portfolio consider the commercial umbrella.
Another thing to consider is that the courts frown on carry high personal liability but low business liability when trying to hide behind the vail.
Ben - yes, that is a good point and something I am keeping in mind. We do have a mortgage, so we would need to talk with our lender to avoid the "due on sale" clause (at least that's how it has been explained to me). I have heard though that most lenders don't mind this as long as it is not changing the ultimate owners on the property - such as a partnership where one person sells to the other. In my instance, my wife and I are currently on the title and would be the sole members of the new LLC. Have you heard otherwise?
George - thank you for your insights. This might be a question for our insurance broker/future attorney, but wouldn't the LLC be formed in Indiana since the rental property is located there (versus Illinois where we will be living)? I like the idea of getting additional liability protection on both the property + a commercial umbrella policy as we are planning on growing our portfolio. Thanks again for the detailed response!
I missed the part where the rentals will be in Indiana. Years ago I spent many months working in Indianapolis and staying at the Canal Street apartments.
I am unfamiliar with LLCs in Indiana. If you need an attorney PM me for some info.
Hey Tyler. Congrats on the rental and your upcoming move! Both an LLC and umbrella policy have their perks—an LLC separates your personal assets, while an umbrella policy is simple and covers more scenarios. Many landlords use both for extra peace of mind. If you're leaning toward an LLC, I can recommend some local options to help set it up. Let me know if you want more info.
Hi @Tyler Bolton I hope I can help clarify given I see a lot of muddled points of view on these matters online. I will preface this with the fact that I have a legal background, specifically with estate planning and asset protection. However, this is not specific legal advice to you, just an opinion based on the circumstances described.
Do I Need an LLC to Invest in Real Estate?
The short answer is No, you don't need it. A better question is "Should I have a rental property in an LLC?", the answer there (to me) is Yes. I would never own rental properties in my personal name. Yes, there are many out there that do it and nothing bad has ever happened, and I say kudos to that, I just would never do that. Second, in terms of asset protection, LLCs are not invincible, but I think what many don't understand is that they are not designed to completely shield your assets from liabilities, on the contrary they are designed to contain and isolate liabilities. They keep inside liabilities inside and outside liabilities outside.
Location of LLC?
Typically, we set up entities in the state in which the property resides. The reason is that one wants to be able to properly avail themselves to the laws and protection of the corresponding state where the property lies. If a person owns a rental property in IN and if something happens on that property, the cause of action (lawsuit) would go before a court in IN, with an IN judge, citing IN law. Therefore, one would want a IN LLC to have title to that property.
>>For purposes of taxes, consult with a CPA to confirm this would work for your situation, but you could have the LLC be treated as a "disregarded entity" and thus, even if you and your wife are members, any profits/losses would "disregard" the LLC and go directly on your personal returns. In other words, in the eyes of the IRS, the LLC would be non-existent. The point of it is to shield that asset from outside liabilities and keep inside liabilities within. LLCs are a legal tool, not a tax one.
Transfer from personal name to LLC/Due On Sale Clause
If one is transferring property title from personal name, a Grant/Warranty Deed would be drafted/recorded to transfer title. NOT a Quitclaim Deed, as you may often see online, because Quitclaim Deeds do not fully warrant the rights and covenants of property as does a Grant and/or Warranty (or equivalent depending on state) does. Most purposes that people on the BP forums are transferring properties to an LLC, would be exempt of the Due On Sale Clause. There is statutory, and Fannie/Freddie guidelines, that explicitly exempt these transfers from being subject to the Due On Sale Clause...asset protection/estate planning purposes are covered.
Why Use LLC when an Umbrella Policy Does the Same?
Umbrella Policies are good, but they are not an asset protection tool, they only cover litigation/damages after you're already in litigation or found personally liable. Also, most Umbrella Policies only pay out if your underlying policy pays out, and the underlying policy will do everything they can to find an exclusion or that you were negligent (which you probably were) in the cause of action to get out of paying the claim. And yes, attorneys make money from forming LLCs, but they make way more when you were negligent and didn't know what you didn't know and end up in a lawsuit. It shouldn't be a question of this versus that, both an LLC and an Umbrella Policy are good to CYA. You would also want to add the LLC entity as an "Additional Insured" party onto the landlord insurance for the property.
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